$250 BIO IS A LOT Trump’s China Deals

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That’s the value of the business deals Trump is looking to announce once his Chinese visit is completed. For some time now, Trump has raged about the imbalance of trade between China and the U.S. and these deals go some way to reducing the imbalance.

Most of the deals are energy related and many have been completed such as the China Investment Corp deal with Goldman Sachs, reported to be worth about $5 bio in investments into the energy sector.

With all these deals known about and the number to be announced, one ought to have thought that the equity market should have a hard rally. The equity market was up on the day but really it was a whimper.

Talking equity markets, the warning signs for traders are flashing. With the ratio between number of advancing stocks compared to decliners falling, this is a troubling signal for short term traders. The ratio is 64% compared to 80% in July.

Bonds remain sanguine about the prospects of rates increasing and the number of times the Fed will hike over the coming 12 months. Bond traders simply don’t believe the Fed will hike three times next year. Inflation remains low, Trump’s budget appears to be running into roadblocks and the yield curve just keeps flattening. Bonds are currently trading about the average for the year despite the prospect of a hike early next month. The 2-year bonds were slightly weaker whilst the 10-year bonds were stable. The probability of a rate hike in December is now at 91%.

For Trump, the worrying event which he has distanced himself from was the loss by the Republicans of the State of Virginia. In what many see as a protest vote against Trump, the loss is a setback. The loss highlights the dangerous steps the GOP are currently taking and the association with Trump may no longer be a path to re-election.

The Tax Bill is likely to be unveiled Thursday. This will be an important moment especially as the GOP has set the deadline for later this month. The Bill needs to be passed and then the debt ceiling passed before the year ends. The interest pass through tax issue that PE was concerned about appears to be resolved. Instead of a holding period of one year the PE company must now have a holding period of three years. This means the majority of PE companies will be unaffected by the tax change.

Meanwhile, a number of Trump donors and supporters are being caught up in what could be seen as meddling. For example, Icahn now faces a subpoena over whether he influenced policy on biofuels when he was advising Trump. There simply is too much noise to allow governing in a coherent manner.

Dan Fuss, the long serving manager of Loomis Sayles Bond Fund, raised concerns about a rout in high yield bond corporates. Accordingly, the manager has reduced the exposure to high yield bonds. He cites, polarisation of politics, policy paralysis, and dwindling market makers as his concerns. He equates the outlook to 1974 with Watergate.  His portfolio has an average bond rating of A, instead of the usual BBB and average duration of 6 ½ years versus the normal 12 years. The probability of a rout has risen from 1% to 20% in his opinion.

Europe like the U.S. is suffering from a flat yield curve. German bunds are at a four-month low and appear as though they are pricing in yet another slowdown in the European economy. Investors in both Europe and the U.S. appear to not be buying into the reflation story.

Recap:

Equities: the S&P 500 was down 0.2%. the Dow was flat at down 0.01%. The Stoxx 600 fell 0.1%.

Currencies: The euro rose 0.1 %. The pound was down 0.4%.

Bonds: the 2-year was steady to close at 1.65%. The U.S. 10-year closed 2.33 % in about 2 bp. The 30-year closed at 2.79 % in about 3 bp on the day. The curve flattened between 1 and 3 bp depending on the maturities. The 2/10 closed at 68, the 2/30 at 113.8 bp and the 10/30 closed at 45.7 bp.

The European 10-year benchmark closes were, gilts closed at 1.21%, bunds at 0.32% and OAT’s 0.53 %. The probability of a rate rise in December is now at 91 % and a rise in June 2018 is now at 96%.

Commodities: Gold rose 0.5% and WTI fell 0.7%.  Copper rose 0.3%. There is a suggestion that China’s record breaking levels of imports is slowing.

Aussie Market Today.

There is no reason for bonds to sell off just for the moment. Bonds remain stable and bid whenever a selloff occurs.

Geopolitical tensions are still a concern although tensions appear to have been cowed for the moment.

Credit for the moment appears well bid and demand continues.

Equities are becoming somewhat pressured and the GOP tax reforms is the main factor for driving the current equity performance in the U.S. This mindset also influences the Aussie equities and any change in the psychology will impact in Australia.

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